In November 2013 we talked about the case of Re UKLI Ltd Secretary of State for Business, Innovation and Skills v Chohan and others  EWHC 680 Ch which considered the difference between shadow and de-facto directors. The issue has been considered again in Smithton Ltd v Naggar  EWCA Civ 939 in which the Court referred in detail to the leading case of HMRC v Holland  1 WLR 2793.
In the recent case, proceedings were brought by a company (Hogart) against its alleged quasi or shadow director, Mr Naggar, for breaches of the Companies Act 2006 which had caused Hogart to suffer loss. Mr Naggar was a director of Hogart’s former holding company but had not been appointed a director of Hogart.
At first instance the Court had decided that Mr Naggar had not been acting as a de facto or a shadow director of Hogart but as a director of the holding company. Hogart appealed.
Lady Justice Arden upheld the lower court’s decision and, when giving judgment, she explained what must be considered to determine whether a person is a de facto or a shadow director.
The statutory definitions of de facto director and shadow director appear in sections 250 and 251 of the CA 06 respectively:
250 “Director” In the Companies Acts “director” includes any person occupying the position of director, by whatever name called.
251 “Shadow director”
(1) In the Companies Acts “shadow director”, in relation to a company, means a person in accordance with whose directions or instructions the directors of the company are accustomed to act.
(2) A person is not to be regarded as a shadow director by reason only that the directors act on advice given by him in a professional capacity..."
It is the reference to a person being a director by ‘whatever name called’ that defines a de facto director meaning that the court will look to the substance of a person’s duties rather than their title or the form of their appointment before deciding whether someone should be treated as a director.
Lady Justice Arden reaffirmed Lord Collins’ view in HMRC v Holland, that there is not one complete test for a de facto director and set out some key practical points to consider.
These relevant considerations are:
- Whilst a differentiation can be made between a shadow director and a de facto director there is also a degree of overlap;
- It is not relevant to consider whether there has been an invalid appointment when considering whether someone is a de facto director. Instead the more relevant point is whether that person has for one reason or another (whether consciously or subconsciously) undertaken the responsibilities of a director;
- The court should also consider the specific capacity an individual was acting in when taking an action. Are they the director of a holding company? Are they a shareholder? Are they a creditor? It could be that the actions could be attributed to an individual’s capacity in one of these roles rather than as a director;
- The court will also take into consideration the corporate structure of the company so as to reach a determination on whether duties performed by the alleged director could be considered directorial;
- It is the actions of an individual that are relevant, not their title;
- Even if a person can demonstrate that they genuinely believed they were not acting as a director if the company, that may not be a good defence if, objectively, they were still performing directorial duties;
- The court must take into consideration the aggregate effect of a person’s actions rather than considering each individual action on its own;
- The court should also consider the context in which an action took place. It could be that one single act may cause a person to be liable ‘in an exceptional case’;
- Further important considerations for the court are: (a) Did the company treat the individual as a director? Did they ‘hold him out’ to be such? (b) What was the outside view of the individual? Were third parties likely to be under the impression that this person was a director?
- Just because an individual is involved in the directorial decision making process, either because they have been consulted or their approval has been sought, so long as they are not the person that is making the decision then that would not be enough for them to be considered a director;
- The actions of the person outside the time in which it is alleged that they were a de facto director can help guide the court as to whether they were a de facto during the pertinent time.
Lady Justice Arden summarised the position by stating that the question of whether someone can be considered a de facto or a shadow director is an objective one, with the Judge being able to apportion varying degrees of weight to the different factors as appropriate. In order for the Judge’s decision to be overturned in these circumstances the Appeal Court would need to be satisfied that the Judge in the lower court was ‘plainly wrong’ in this regard.
The judgment provides an excellent and succinct summary of the different factors that a court will take into consideration when determining this issue. It is clear that individuals exerting a degree of control over a company will not be protected from director’s liabilities and responsibilities on the basis they do not have the title of director nor been appointed as a director. However it would have to be proven that this individual’s actions cannot be attributed to any other role that they may hold.